Calculate Marginal Propensity to Consume from the following: (i) Equilibrium income Rs 350 (ii) Consumption expenditure at zero income Rs 20 (iii) Investment Rs 50

We know, Y = C + I ( A g g r e g a t e d e m a n d = A g g r e g a t e s u p p l y ) ⇒ Y = a + b Y + I ⇒ b Y = Y - a - I ⇒ b = ( 350 - 20 - 50 ) / 350 ⇒ b = 280 / 350 ⇒ b = 0 . 80 So, MPC is equal to 0 . 80 .

Explain determination of equilibrium level of income using ‘Consumption plus Investment’ approach. Use diagram. OR Explain, with the help of a diagram, how equilibrium level of income is determined considering aggregate demand and aggregate supply.

The economy is said to be in equilibrium when Aggregate Demand (consisting of consumption and investment expenditures) is equal to the Aggregate Supply (consisting of total output). AD is represented by the (C + I) curve while AS is represented by the 45 degree line (or the C + S curve) in the analysis. Consumption expenditure varies directly with income while investment expenditure is independent of income. The intersection or equality of AD and AS gives us the equilibrium. The equilibrium situation is a situation of effective demand because AD is equal to AS. Here, E is the point of equilibrium where AD is equal to AS. OY is the equilibrium level of output. When AD is less than AS: When AD is less than AS, the (C + I) curve lies below AS curve. Consumers and firms are willing to purchase less goods than firms are willing to produce. As a result, planned inventory rises above desired level. Firms decrease employment and output to bring economy back to point E. When AD is greater than AS: When AD is greater than AS, the (C + I) curve lies above AS curve. Consumers and firms are willing to purchase more goods than firms are willing to produce. As a result, planned inventory falls below desired level. Firms increase employment and output to bring economy back to point E.

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What will be the level of ex-ante aggregate demand when autonomous investment and consumption expenditure is Rs $100$ Crore and MPS is $0.4$ and level of income is Rs $4, 000$ crore.

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Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Calculate Marginal Propensity to Consume from the following:

(i) Equilibrium income	Rs $350$
(ii) Consumption expenditure at zero income	Rs $20$
(iii) Investment	Rs $50$

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